Unemployment and Hours of Work over the Business Cycle

Why has unemployment remained relatively low even though the economy is sputtering?:

A Hidden Toll on Employment: Cut to Part Time, by Peter S. Goodman, NY Times: …On the surface, the job market is weak but hardly desperate. Layoffs remain less frequent than in many economic downturns, and the unemployment rate is a relatively modest 5.5 percent. But that figure masks the strains of those who are losing hours or working part time because they cannot find full-time work — a stealth force that is eroding American spending power.

All told, people the government classifies as working part time involuntarily — predominantly those who have lost hours or cannot find full-time work — swelled to 5.3 million last month, a jump of greater than 1 million over the last year.

These workers now amount to 3.7 percent of all those employed, up from 3 percent a year ago, and the highest level since 1995.

“This increase is startling,” said Steve Hipple, an economist at the Labor Department.

The loss of hours has been affecting men in particular — and Hispanic men more so. … Some 28 percent of the jobs affected were in construction, 14 percent in retail and 13 percent in professional and business services…

“The unemployment rate is giving you a misleading impression of some of the adjustments that are taking place,” said John E. Silvia, chief economist of Wachovia in Charlotte. “Hours cut is a big deal. People still have a job, but they are losing income.”

Many experts see the swift cutback in hours as a precursor of a more painful chapter to come: broader layoffs. Some struggling companies are holding on to workers and cutting shifts while hoping to ride out hard times. If business does not improve, more extreme measures could follow.

“The change in working hours is the canary in the coal mine,” said Susan J. Lambert of the University of Chicago,… an expert in low-wage employment. “First you see hours get short, and eventually more people will get laid off.” …

The growing ranks of involuntary part-timers reflect the sophisticated fashion through which many American employers have come to manage their payrolls, say experts.

In decades past, when business soured, companies tended to resort to mass layoffs, hiring people back when better times returned. But as high technology came to permeate American business, companies have grown reluctant to shed workers. Even the lowest-wage positions in retail, fast food, banking or manufacturing require computer skills and a grasp of a company’s systems. Several months of training may be needed to get a new employee up to speed.

“Companies today would rather not go through the process of dumping someone and hiring them back,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “Firms are going to short shifts rather than just laying people off.” …

And it works just the opposite way on the other side when GDP begins to recover. At first, firms will increase hours rather than employment. Firms won’t invest in new workers until they are sure that the economy is improving, and that doesn’t happen with just a single month or a single quarters worth of improved data. It takes a time for enough data to accumulate to convince firms that business really has taken a turn for the better, that what they are seeing is not just a temporary blip, and that it is worthwhile to pay the costs of hiring and training new workers.

This provides one potential explanation for why employment growth has been sluggish in the recovery period after the last two recessions, both of which occurred after the revolution in digital technology. To the extent that technology has increased training costs over time, the delay in the recovery in employment would be even longer. With higher training costs, firms would need to be even more certain that things have improved, i.e. they would need to wait for and analyze more data than before to be convinced that it’s worthwhile to pay the cost of investing in new workers, and that increases the delay between the uptick in GDP and the uptick in employment (and to the extent that technology can substitute for labor, the employment response could be even more sluggish and muted).

Originally published at Economist’s View and reproduced here with the author’s permission.

One Response to "Unemployment and Hours of Work over the Business Cycle"

Anonymous August 4, 2008 at 1:05 pm

I believe our economy is now in imminent danger. Even though many economic experts have insisted our unemployment rate has been relatively low, we should realize that the "Missing Class (or Near Poor Class)" has rapidly increased over the last several years. Now, much of the Missing Class is rapidly collapsing into the Poor Class. I strongly believe that if we don’t do something SOON, we will not be able to avoid from a serious economic and social collapse in the very near future to come.